Human Capital

Question 1

Given concerns about ability and selection bias, how can we estimate returns of schooling?

Answer 1

in lectures we have focused on ‘mature students’ who have worked before attending school
- compare pre- and post-schooling earnings for these individuals which is known as ‘person fixed effects’ model
- focus on vocational education e.g. apprenticeships

Question 2

Failing to take account of ability bias causes us to overstate the returns of earnings. True or False?

Answer 2

True

Question 3

Failing to take account of selection bias causes use to understate returns to schooling. True or False?

Answer 3

Neither - It’s unclear whether the return is too high or too low

Question 4

What will training lead to?

Answer 4

An increase in the marginal product of the workers receiving the training

Question 5

What are the two types of training?

Answer 5

• General training: teachers the workers skills that are useful in all firms e.g., word processing, truck driving
• Specific training: teaches the worker skills that are only useful in a single firm e.g., learning to operate firm-specific equipment/software

Question 6

What does K stand for in the graphs for training?

Answer 6

training costs

Question 7

What is ability bias?

Answer 7

unobserved differences in ability
- people either have more or less of the skill

Question 8

What does ability bias usually lead to?

Answer 8

overstating the returns of schooling

Question 9

When does estimating returns to schooling become even harder?

Answer 9

If wage-schooling loci cross

Question 10

What is selection bias?

Answer 10

Individuals selecting the optimal occupation based on their talents

Question 11

What is the estimated return to schooling of selection bias?

Answer 11

Unclear if estimated return is too high or too low

Question 12

What are the differences between Ability bias and Selection bias

Answer 12

Ability Bias:
- one type of skill
- people either have more or less of the skill
Selection Bias:
- Different types of skills
- People have different amounts of each type
- Different jobs require different types of skills

Question 13

Wage-Schooling Locus Properties

Answer 13

1. Upward sloping
2. Concave
3. Slope shows increase in earnings with an additional year of school: this increase in earnings is the marginal rate of return to schooling

Question 14

How do we estimate returns if individuals have different wage-schooling loci?

Answer 14

For most people, we only observe one level of schooling

Question 15

What is the wage-schooling locus

Answer 15

shows how earnings vary with the years of schooling

Question 16

What are the factors affecting education decisions?

Answer 16

1. Age
   - older individuals are less likely to go to school
   - fewer periods in which to receive benefits
   - higher forgone earnings
2. The discount rate r
   - Higher r means less likely to go to school
   - future earnings are worth less
   - individuals place a higher value on current consumption
   - Value of r can be related to other behaviour such as smoking
3. Future earnings differential
   - Larger differential = higher return to schooling
   - Smaller (lower) differential = less likely to go to university when differential is lower
4. Changes in direct cost of schooling and foregone earnings
   - probability of going to school is related to cost of tuition
   - university is counter-cyclical

Question 17

Larger future earnings differential leads to higher/lower return to schooling

Answer 17

= higher return to schooling

Question 18

How do you calculate what stuff in the future is worth today?

Answer 18

Divide

Question 19

How do you calculate what something today is worth in the future

Answer 19

multiply

Question 20

What approximately are returns to schooling in the developed world?

Answer 20

Around 10% per year
-> Accounts for ability and selection bias

Question 21

What are the returns of schooling in less developed countries?

Answer 21

Almost 40%

Question 22

Smaller future earnings differential leads to higher or lower return to schooling

Answer 22

less likely to go to university

Question 23

What are the two types of training?

Answer 23

1. General training - teachers the workers skills that are useful in all firms e.g., word processing, truck driving
2. Specific training - teaches the worker skills that are only useful in a single firm e.g., learning to operate firm-specific equipment/software

Question 24

What does K stand for in training graphs

Answer 24

K = training costs

Question 25

Level of post-school investment will depend on:

Answer 25

• marginal benefit of the investment
• marginal cost of investment
  one invest till MB = MC
  we assume MB = high wage and MC = foregone earnings

Question 26

What are the properties of age-earnings profiles?

Answer 26

1. Highly-educated workers earn more than less-educated workers
2. Earnings rise over time, but at a decreasing rate

Question 27

With mobility costs, firm will be more willing to pay for what?

Answer 27

For specific and general training

Question 28

What is r?

Answer 28

the discount rate

Question 29

What is R?

Answer 29

the labour-market return to one unit of Human Capital

Question 30

What is human capital measured in?

Answer 30

units

Question 31

One invests until what equals what?

Answer 31

MB = MC

Question 32

What are the two components of the unemployment rate?

Answer 32

1. Number of people unemployed
2. Length of unemployment
   - Firm specific training could affect both

Question 33

What are the properties of post-school human capital investment?

Answer 33

• Explains shape of age-earnings profile
• people reduce Human Capital investment with age - thus earnings growth slows with age,
• earnings become flat when Human Capital investments stop

Question 34

Suppose Kappa has higher earnings with a secondary school degree, but Beta has higher earnings with a university degree. A simple comparison of Kappa and Beta’s earnings will __________ the returns to schooling for _______

Answer 34

overstate, Kappa

Question 35

Regarding post-schooling human capital investment:

Answer 35

The worker should keep investing in this form of human capital until the marginal benefits equal the marginal costs.

Question 36

With who paying is firm specific training most likely to occur?

Answer 36

When the firm and worker share the cost of the training

Question 37

Who should pay for general training?

Answer 37

the worker